STRENGTHS

WEAKNESSES

Restrictions on movement in the West Bank imposed by Israel; blockade of the Gaza Strip by Egypt and Israel

Stalemate in the peace process with Israel

Reductions in international aid

RISK ASSESSMENT

Weak growth in the West Bank and a worrying recession in the Gaza Strip

The Palestinian economy is expected to remain split into two zones with contrasting dynamics. While growth, although weak, will be real in 2019, the overall result will conceal substantial differences, with the West Bank recording estimated growth of 2.2%, while the Gaza Strip is expected to continue its recession, largely caused by the economic blockade imposed on the region. West Bank growth has been on average higher than that of Gaza since 1995 (5.5% and 3.1% respectively) and less volatile. The structure of these economies, which was essentially similar until the early 2000s, will continue to move in different directions in 2019. Private consumption (90% of GDP) is expected to be the main economic driver in both cases. In Gaza, consumption will be hurt by the high unemployment rate, particularly because of the Israeli blockade, which prevents Gazans from working in or exporting to Israel. West Bank consumption is expected to be less affected, with Israel being the workplace of 17% of the working population and the primary destination for exports. In general, Palestinian exports are expected to be affected by the relative strength and stability of the shekel, which will undermine the export competitiveness of companies while at the same time providing some monetary stability. Palestine does not have its own currency, so it is dependent on Israeli monetary policy. The Gaza Strip will continue to rely heavily on public spending, which is equivalent to more than 40% of GDP, or twice as much as in the West Bank, and the projected decline in foreign aid in 2019 will be detrimental to the Palestinian Authority's (PA) economy. Productive investment, which is scarce in both areas, notably because of the unfavourable business environment (114th in the Doing Business ranking) and unstable situation, will stabilise at 0.5% of GDP in Gaza and 6% in the West Bank (or 4% and 26% of GDP respectively if construction investment is added).

Large twin deficits resulting from the conflict situation

The PA's government deficit is expected to continue to widen in 2019. Income will continue to decline as a proportion of GDP, partly due to the cuts to international aid. Conversely, public spending is set to remain at a similar level to 2018. Civil servant salaries, which account for 50% of current expenditure, are expected to play a major role in maintaining a high level of expenditure (90% of which is current). In addition, Palestinian imports and exports are subject to taxes collected by Israel on behalf of the PA. These are then transferred to Palestine and represent the PA's main source of income. The transfer of these revenues depends on the relationship between the two countries, with Israel able to block them if Palestine does not pay for its electricity. If this revenue is blocked, the PA would see its debt, which is largely domestic, explode to as much as two thirds of GDP by 2023 to finance its government deficit.

The huge deficit in goods and services (around 38% of GDP in 2017) is expected to continue in 2019, with an uptick in exports offsetting a slight increase in imports, mainly of capital goods. Amounts received by expatriates and earned by cross-border workers (25% of GDP) are expected to decline in 2019. This will cause a deterioration in the current account deficit, a downturn further amplified by the decline in external aid, which is expected to continue in 2019. One third of the current account deficit will be financed by government and private donations, with the remainder made up of non-resident investments.

An unbearable internal situation and a difficult relationship with the United States

Re-elected in November 2016, 83-year-old Mahmoud Abbas, President of the PA and the Palestine Liberation Organisation (PLO), controls the West Bank, while Hamas, led by Ismail Haniyeh, has controlled the Gaza Strip since being democratically elected in 2007. Relations between the two territories are strained, and in 2017 the PA stopped paying for electricity for Gaza, causing a humanitarian crisis. The situation in the Gaza Strip raises humanitarian and social concerns. Gazans, who have almost no access to electricity, also have to deal with Israeli and Egyptian blockades, which prevent them from obtaining basic necessities and leaving the country. In response to this situation, young Palestinians organised a “Great March of Return” whose aim was to force a way through Israeli barriers and return to the other side of the border. The campaign resulted in the deaths of 166 Palestinians and one Israeli soldier. The international situation will continue to evolve in 2019, after a turbulent year in 2018. The United States established its embassy in Jerusalem in May 2018 to mark Israel's 70th anniversary, de facto recognising the city as the capital of Israel. The consulate, the main point of contact with the PA, will be moved there, and US President Donald Trump has cancelled USD 200 million in aid to Palestine. However in 2019, President Trump is expected to unveil plans to resolve the conflict. In addition, that same year, the PA will chair the “G77 + China” Group at the UN.